A Creditor's Plan for The Postal Service

The Issa/Ross Postal Reform Bill presents a future for the Postal Service and stakeholders that serves the interests of two of the Postal Service's creditors: the Office of Personnel Management, to whom the Postal Service currently must make payments for retiree benefits and the Department of Labor, which administers workers compensation programs.   The bill forces changes in Postal Service operations, labor contracts, and rates all designed to ensure that those payments are made according to the schedules currently in law.

If the Issa/Ross Postal Reform Bill is signed into law, the Office of Personnel Management and the Department of Labor face minimal risk that the Postal Service will not pay them.  For the Office of Personnel Management and the Department of Labor this is a good bill, as they will likely get 100% of what the law now states they are owned regardless of what happens to the Postal Service and postal market once the obligations to them are paid.

The Issa/Ross Postal Reform bill does not leave the Federal government as a creditor off the hook.   By expanding the Postal Service's borrowing authority by $10 billion, the bill increases the risk facing the Department of the Treasury.  Given the losses and cash needs of the Postal Service, by 2020,  the Department of the Treasury will then hold $25 billion in Postal Service debt with no clear indication as to whether demand for Postal Service's products will give it the revenue needed to pay off that debt.

By increasing the debt held by the Department of the Treasury, the Issa/Ross Postal Reform bill creates a conflict between two of the largest creditors (i.e. the Office of Personnel Management and the Department of Labor) and other large creditor, the Department of the Treasury.    This bill should force the Department of Treasury to become more involved in postal reform policy as repayment of Postal Service debt requires either a business plan that creates a financially viable Postal Service or a plan to liquidate assets as the delivery and other services of the Postal Service are wound down over time.

By focusing on meeting the needs of two of the creditors, the Issa/Ross downplays the federal government's ownership role  as it relates to the Postal Service.  By ignoring the ownership role, the bill has little interest in maintaining the value of the enterprise so that it can thrive as either a government entity or private corporation.   

Finally, the Issa/Ross develops postal policy that takes the Postal Service in a different direction than nearly every other government has taken then national postal operator.   In most of the world, the national postal operators have been put on a path involving corporatization and eventually privatization.  In these countries, the goal is to ensure that there is a postal operator that can operate as a viable business that can attract private debt and possibly equity investors as the best way to develop the digital and physical communications delivery infrastructure as well as a parcel delivery infrastructure necessary for the growth of on-line and mobile retail sales.

Instead, the Issa/Ross bill takes the Postal Service in the opposite direction.   Over time the Postal Service will increasingly look more like any other United States government entity and less like the businesses that handle other parts of the print and parcel delivery supply chains or the enterprises that run the national posts outside of the United States.  



   

Representative Ross Indicates that Issa/Ross Bill will have no Change in Retiree Payments

In a tweet, Representative Dennis Ross hinted that the bill that Representative Darrell Issa and he will introduce tomorrow will not contain any change to the payment schedules for retiree obligations that are now contained in all other postal reform bills.

RepDennisRossDennis Ross

#USPS, this is why you prefund retiree benefits. http://t.co/wm1cnvI | "no one else does..." and this is where they are now.

If there are no changes in the payment schedules to reflect overpayment of either FERS or retiree healthcare benefits then the Issa/Ross bill will need to find quick reductions in Postal Service costs elsewhere.   There are few options but all will likely affect both compensation to postal employees and service to postal customers.

Representative Issa and Ross have given some hint to these changes in the hearings that they have held and in particular the titles of the hearings.  These hints have indicated that the bill likely include the following:

• Expedited reduction in service from 6-days per week to 5-days per week;
• Expedited public review process for the consolidation or closure of processing facilities;
• Expedited public review process for the closure of post offices and changes in the law to allow closure of post offices solely for operating at a deficit;
• Reductions in Postal Service compensation at least as great as proposed by Senator John McCain in amendments 251 and 252 to Senate Bill 493, the Small Business Reauthorization Bill.  Cuts will occur in:
• Executive pay
• Postal Service share of health care and life insurance benefits
• Reduction in retiree benefits for postal employees including the possible elimination of Postal contributions to FERS and the benefit that these contributions provide.  (A similar proposal was made for all government employees in the Senate.)
• Postal Service's ability to manage labor costs either through the labor negotiation process or in defining positions of employees currently represented by employee associations.

While these provisions will save the Postal Service money, it is unlikely that they will reduce Postal Service costs sufficiently and sufficiently quick to eliminatethe Postal Service's deficits and allow it to continue to make the retiree healthcare payments.   To do that, Representatives Ross and Issa may need to include a provision in their bill to institute a reduction in force (RIF) of around 10% of Postal Service employees to reduce payroll quickly to match income and possibly a provisions to reduce Postal salaries and/or benefits beyond those proposed by Senator McCain and others and that these cuts would include cuts in compensation to both employees that are and are not covered by labor agreements.    

A reduction of 10% of the Postal Service Workforce reflects the workforce cuts that Representative Issa, Ross and Chafitz introduced in HR 2114.   While that bill would reduce the the Federal workforce over 3-4 years, to get the cost savings required, the Postal Service would need to reduce its workforce almost immediately by 10% to get the cost savings needed to reduce costs to break-even levels.  It is unclear how far or how quickly cuts in salaries or benefits could be implemented to employees who are and are not covered by labor agreements.

Did Darrell Issa Sabatoge the USPS-APWU agreement

In letter to American Postal Workers Union (APWU) members, APWU President Cliff Guffey identified that a key obstacle to ratification of the contract is rank and file anger with the efforts of Republicans to restrict union rights and reduce the pay and benefits of public and postal employees.   President Guffy's letter indicates that the tone that Republican members of Congress at the April 5th House Oversight and Government Reform hearing combined with the state legislative conflicts in Wisconsin, Illinios and Ohio created an environment in which rank and file APWU members are looking for a way to protest the treatment of unionized employees by Republican politicians.   The APWU-USPS ratification may have become the vehicle for that protest.

The press release quoting the letter lays out President Guffey's argument that the APWU-USPS contract is not the place to vent anger at Republican politicians.

Some very powerful politicians have set their sights on postal employees, APWU President Cliff Guffey has warned, and union members must respond decisively.

“Anti-labor members of Congress have said the union’s tentative Collective Bargaining Agreement [PDF - members only] is too favorable to workers,” the union president noted. “They favor contracting out virtually all of our jobs.

“I have a simple response,” he said. “I encourage every APWU member to get actively involved in union affairs — and to start by voting on ratification of the tentative Collective Bargaining Agreement. We also must get much more involved in the legislative arena.

“Don’t let these naysayers discourage you from voting.”

At an April 5 hearing of the House Oversight and Government Reform Committee, Chairman Darrell Issa (R-CA) and other Republicans repeatedly criticized Postmaster General Patrick Donahoe and members of the USPS Board of Governors for agreeing to the union’s demand during negotiations to retain protection against layoffs. They also said the Postal Service needed more freedom to close postal facilities and cut the workforce.

“This is an attack on our collective bargaining rights,” Guffey said. “The APWU and the Postal Service reached an agreement that would benefit both sides — and now anti-union legislators are attempting to undermine it.”

President Guffy is right to warn APWU members to not use their vote on the USPS contract to vent anger at Republican politicians.   APWU members need to look at the contract and decide whether they can live with the changes in workrules and in particular the possibility that many positions will follow a non-traditional full-time schedule.   They need to determine whether the changes in workrules and contracting-out provisions create opportunities for APWU members that did not exist before and could create opportunities for APWU members to work with the USPS to work with the Postal Service to create products that could compete with presorters.  They need to look at the contract and decide whether it increases or decreases the likelihood that they will have a job with the Postal Service until they are ready to retire given the change in the mix and volume of mail.   They need to look at the changes in pay and benefits for current employees and future employees and determine whether the contract provides them with sufficient protection from health insurance and general inflation as opposed to what could be imposed by legislative action in the current or future Congresses.  Finally, they need to evaluate the risks that exist from turning the development of contract provisions to an independent arbiter who will develop his decision around the time that the Postal Service defaults on payments for retiree health benefit and workers compensation liabilities.

Why the April 5th Hearing is Important

The quotes from Congressmen Darrell Issa and Dennis Ross that have been quoted in the press have all come from  a press release of  the House Oversight and Government Reform Committee.    Most articles ignored the following quote "This hearing will establish an important baseline for Congress' upcoming work on the Postal Service's structure, fiscal health and self-governance," from Congressman Darrell Issa that better than anything so far lays out the issues that the committee will look at in regards to the Postal Service.  These are:

• Postal Service's structure - this most likely focuses on the management structure as well as questions regarding the network of processing plants and retail outlets, the use of contractors, work sharing, civil service employment law and how it applies to the Postal Service, and labor relations issues including the current collective bargaining process
• Postal Service's fiscal health - the focus here is clearly the prospects of the Postal Service being financially self-sufficient.   This will likely include the question, "Can the Postal Service be self-sufficient and pay the retiree benefit liability obligations currently required by law?"
• Postal Service Self Governance - the focus here is the Postal Service's business model.   Here the committee will likely focus on the Board of Governors and senior management looking to see if the current structure gives the proper incentives to ensure financial self-sufficiency.   The focus on the business model will need to include returning to a government department model as well as corporatization and privatization models employed outside of the United States. 

The hearing on April 5th will be a full committee hearing.  As a full committee meeting, the review of the APWU contract will get broader coverage on the 24 hour news channels, other print and broadcast media, on talk-radio and the blogosphere.   This could raise the Postal Service up a notch or two on the national policy debate.   How that affects the ability of Congress to find a solution that solves the Postal Service's problems is anyone's guess.

Why Didn't APWU Compensation Go Down?

Government Executive and Federal Times both reported today that the House Oversight and Government Reform Committee will be holding a hearing on April 5 on Postal Service pay.   It is clear from quotes attributed to Congressmen Darrell Issa and Dennis Ross that the Postal Service's witness is going to have a very unpleasant time. 

The Postal Service should expect a grilling from members of both parties in Congress.   Congress is the representative of the shareholder and the two largest creditors facing the prospect that their bills for over $5.5 billion will not be paid next fall and similar bills in future years may not be paid.  If the Postal Service takes actions that do not reduce the non-payment risk of those payments due next fall and ones due in future years than Congress is within its right to raise questions as to whether the current Board of Governors needs to be replaced and could even put the new Postmaster General and his management team at risk of replacement.  
The grilling that the Postal Service faces will likely ask one question repeatedly.  Why was the Postal Service willing to sign any contract that did not freeze or reduce the compensation of current APWU members if APWU members enjoy a significant wage premium?  

This will be the central question because testimony was presented by Michael Wachter in 2003 to the President's Commission that stated Postal Service employees enjoyed a 34.2% wage premium has been quoted by Representative Dennis Ross as the basis for his concern that the Postal Service was not tough enough in negotiating the APWU contract.  Dissapointment with the agreement was also expressed by Congressman Darrel Issa who stated "The union contract renewals are the best chance to find new savings. Unfortunately, this looks like a missed opportunity. The Postal Service must show Congress and the American people that it can pay its own way, because the numbers do not seem to add up."


These comments reflect real concern because it is not clear if the Postal Service will have the money to pay the wage increases to current employees in 2012 through the end of the contract.   However, it is not clear that going to arbitration would have produced a more favorable settlement for the Postal Service, even if it presented new testimony of Dr. Michael Wachter that continued to show a wage premium of a similar magnitude.  Having looked at the challenges of unionized firms facing the need to reduce compensation expenses in order to remain competitive found few firms that were able to do this outside of bankruptcy regardless of whether negotiations were conducted under the Railway Labor Act or the National Labor Relations Act.   Even firms without unions find it difficult to impose significant pay cuts on current employees, although it was not uncommon during the last recession for non-union firms to both increase the share of health care premiums paid by employees and eliminate the match to 401-K plans.   Many of these companies have restored these benefits as the recession ended. 
 
The House committee has two options in looking at the compensation question.  The easy way is to bash Postal Service management and grab headlines by focusing only on the wage premium issue.  A more constructive alternative would look at what would be required to bring compensation closer in line to market values.   To do that they need to look at the following questions:

1. Update the Wachter study and include analyses that look at alternative alternative approaches to this question.  
2. Update the Wachter study using the compensation of APWU members under various scenarios under which increasing proportions of APWU members are employed under the new compensation schedules, employee classifications and work rules.
3. Examine the impact of the contract provisions that increase flexibility that allow the Postal Service to eliminate the cost of contracted services for work that an APWU member could do for 2 to 4 hours within a longer shift.  
4. Similarly, what is the difference in cost between using an APWU member and the non-union employee that the Postal Service is planning to displace?
5. Examine the options the Postal Service has to convince existing APWU members to retire.   A large share if not the majority of APWU members are at the highest pay step for the type of work that they do.   Replacing these employees that are earning the highest availalble salary with those who are new would significantly cut costs.   
   
   In particular, the committee needs to ask two questions here.  First, what proportion of APWU members, other postal unions, and management employees are eligible to retire now?  Second, what is the increase in the retirement rate if a VERA is introduced and for retirement incentives ranging between 5,000 and a half year's salary?  The answer to these questions would help illustrate the type of incentive necessary to increase the attrition rate to a level high enough to significantly cut compensation.
6. Examine the arbitration process in order to determine the probability whether the Postal Service would have been generated a better result than what the Postal Service agreed to using either current law or changes suggested by Senator Susan Collins.  This examination should also determine whether alternative approaches allowed by the National Labor Relations Act or Railway Act could have produced a result that would have had frozen or reduced the compensation of APWU employees without the threat of barnkrutcy or liquidataion.

If the committee concludes after asking these questions that the APWU contract and similar negotiated contracts with other unions as well as contracts that arbitration would produce would still be unaffordable, then it must determine if the more drastic option only available to firms in bankruptcy should be pursued.   That would allow the Postal Service to break existing labor agreements and impose lower cost compensation schedules.  In doing so, the committee has to ask how much this option would disrupt the mail delivery system and the probability that the Postal Service will have a business that can generate the cash over the next thirty years to cover its payments on retirement liabilities.

Mission Statement for House Oversight Committee

Congressman Darrell Issa introduced the mission statement of the House Oversight and Government Reform Committee at the end of the January 26, 2011 hearing on Troubled Asset Relief Program.  The mission statement was introduced at the first hearing of the committee.   As the mission statement was mentioned at the close of the hearing, it has received limited press attention and most postal stakeholders and policymakers have not seen it.   The mission statement is as follows:

Americans deserve to know that money Washington takes from them is well spent. Americans deserve an efficient, effective government that works for them. Our job on the Oversight and Government Reform Committee is to help Americans secure these rights.

For postal policy, the mission statement provides little guidance as to Congressman Issa's or for that manner the committee's thinking.    It may provide some ideas for those interested in policy changes that may be proposed if they look carefully.  In particular, the line of thinking suggests that the Committee is looking for ways to understand:

• What are the needs of individual, small business, and large business customers of the Postal Service, and how will they change over the next decade?  House members need to understand what those paying postage need from a postal system.
• Is the Postal Service meeting the needs of its individual, small business and large business customers today and does current law allow them to make the changes necessary to meet those needs over the next decade?   Answering this question will likely require examining how law and regulation restrict the mail market and reduce the economic impact of the firms in the mail and parcel delivery supply chain.
• Is the Postal Service providing services that its individual, small business, and large business customers need in the most efficient and effective manner possible?  The answer to this question could be used to bash postal management and labor or it could help postal management and labor figure out how to most efficiently serve customers and ensure good paying jobs in doing so in the same manner that United Parcel Service is able to offer good paying jobs to its union employees.
• Is the money that Washington takes from its citizen in the form of postage to cover retiree expenses that either should not be the Postal Service's responsibility or are overstated well spent?  The answer to this question should focus on determining whether it is good fiscal policy to balance the budge budget by bankrupting the Postal Service and putting the service that generates over $1 trillion in sales and 8 million jobs at risk.
• Would removing the disputed retiree obligations from the Postal Service be the equivalent of removing a "stamp tax" or a "bailout?"   How this issue is framed is critical in how the tea party faction within the Postal Service looks at changes in postal policy.   

In addition to introducing a mission statement, Congressman Issa managed the hearing in a non-traditional way that many who follow postal policy will appreciate.    He dispensed with the traditional practice of having members of Congress read or make a statement before the testimony of witnesses.   This increases the amount of time available for questioning witnesses and more than likely reduced the total time that Congressmen and women, witnesses, and interested observsers must spend to attend a hearing.  For postal policy, increasing the amount of time when witnesses answer questions is important for this Committee as many of the committee members have limited understanding of the postal market, the system of private sector companies in addition to the Postal Service that takes communications from concept to delivery, take a sale of an item from customer acquisition to delivery of the parcel, and the critical role that physical delivery provided by the Postal Service and private sector firms, most of whom are unknown to postal observers, will have in the future even with the expansion of communications options and mobile and and web based shopping.

Did Issa Provide an Entry for Postal Reform?

According to Politico, Congressman Darrell Issa sent letters to more than 150 trade associations, companies and think tanks last month requesting a list of existing and proposed regulations that would harm job growth.   Postal regulations should be included on this list as Postal regulations and law affect nearly 8.5 million jobs in the United States with over 90% of all jobs in the private sector.

This effort now is critical as it does not appear that Congressman Issa has included postal issues among his top priorities for investigations as the new Congress convenes.  The Washington Post summarized his agenda as follows:

SOURCE: Staff reports | The Washington Post - Jan. 4, 2011

Of these six items, only the first can be linked to the problems of the postal industry.   Postal Stakeholders need to develop a concise list of regulations and laws that raise the cost of managing the Postal network, prevent the Postal Service from offering market-based prices to its customers, limits the Postal Service's ability to fully use its existing human, capital, and intellectual property assets to offer services and generate revenue, and impose unwarranted costs on the Postal Service for workers compensation or retiree benefits that it should not be responsible for or have already paid.

In addition to creating this list, Postal Stakeholders need to identify their links to as many of the 150 trade associations and think tanks as possible to ensure that the list of Postal regulations and laws are on that industry's list of regulations that affect job creation.   Mail is a key part of nearly every industry from health care, to retail, to financial services. 

 

Tying postal reform to job creation should not be hard.   Postal reform creates jobs as mail is now and will remain a core method of communicating with existing and potential customers that are difficult to reach through traditional advertising modes (i.e television, cable television, radio, newspapers, and billboards) as well as web and mobile based methods. Mail remains the primary method of handling financial transactions and will likely remain so for the next few years.  Finally, and most importantly, the mail industry which includes FedEx and United Parcel Service are the backbone that allows for the growth of e-commerce by ensuring delivery of goods purchased over the web or on a mobile device.    The Postal Service is core part of that network as it handles most of the deliveries of light weight parcels regardless of whether the sender has the Postal Service, United Parcel Service, FedEx or some other carrier sell the transportation service. Any regulation that restricts competition in the parcel industry, including competition from the Postal Service, or raises costs of the providers of transportation services reduces the growth of e-commerce by making the products sold by e-retailers less competitive.